As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has been in place for four annual raises, are as follows: (1) a high proportion (78 percent) of those offered the plan joined, (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise, and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions.

Economic theory generally assumes that people solve important problems as economists would. The life cycle theory of saving is a good example. Households are assumed to want to smooth consumption over the life cycle and are expected to solve the relevant optimization problem in each period before deciding how much to consume and how much to save. Actual household behavior might differ from this optimal plan for at least two reasons. First, the problem is a hard one, even for an economist, so households might fail to compute the correct savings rate. Second, even if the correct savings rate were known, households might lack the self-control to reduce current consumption in favor of future consumption (Thaler and Shefrin 1981).

One fact that underscores the important role of self-control is that the typical middle-class American household accumulates retirement wealth primarily in three forms: social security, pensions, and home equity. Neither social security nor defined-benefit pension plans require willpower on the part of participants, and once a home is purchased, the monthly mortgage bill provides a useful discipline in building up equity.

Those Americans who have access to and make use of all three lowwillpower savings techniques appear to be doing a decent job of saving for retirement. Gustman and Steinmeier (1998), using the 1992 Health and Retirement Survey of households with heads of household born between 1931 and 1941, find that households with pensions have what appear to be adequate income replacement rates. A majority of the pensions in their sample are of the defined-benefit variety, however, in which self-control plays no role. Over the past decade, there has been a rapid change toward defined-contribution plans that require employees to actively join and select their own savings rate. For those workers who are eligible only for a defined-contribution plan and elect not to join or to contribute a token amount, savings adequacy may be much lower. One hint at this comes from Gustman and Steinmeier’s analysis of workers who do not have pensions. The adequacy levels of their wealth and savings are substantially lower than those with pensions. Indeed, those workers with pensions are wealthier by approximately the value of their pension.

For whatever reason, some employees at firms that offer only definedcontribution plans contribute little or nothing to the plan. In this paper, we take seriously the possibility that some of these low-saving workers are making a mistake. By calling their low-saving behavior a mistake, we mean that they might characterize the action the same way, just as someone who is 100 pounds overweight might agree that he or she weighs too much. We then use principles from psychology and behavioral economics to devise a program to help people save more. The program is called Save More Tomorrow (or SMarT), and the basic idea is to give workers the option of committing themselves now to increasing their savings rate later, each time they get a raise. We report extensive data on one firm that implemented the program in 1998 and preliminary data on two other firms that implemented it recently. We note that the null hypothesis predicted by the standard economic approach is that workers will have no interest in joining the SMarT plan.

If households are already choosing their optimal life cycle savings rate, then they will not join a program that will commit them to periodic changes. In contrast, the behavioral economics prediction is that workers will find this program quite attractive and that it will significantly increase the savings rates of those who join the plan.